Wednesday, November 30, 2005

". . .for while [Ebenezer]Howard was not planning cities, he was not planning dormitory suburbs either. His aim was the creation of self-sufficient small towns, really very nice towns if you were docile and had no plans of your own and did not mind spending your life among others with no plans of their own. As in all Utopias, the right to have plans of any signficance belonged only to the planners in charge. . ." [The Death and Life of Great American Cities, p. 17]

"What should an economy maximize? We normally say utility or some such if we are microeconomists, or savings and investment if we are macroeconomists. These objectives define our welfare assumptions. Recently, there's been a lot of discussion as well as noise and confusion about the ethics and welfare meaning of economic growth (Norberg, Hamilton, et al). Yet all of it eventually drills down to the meaning of income and wealth. Recently even economists have revived the criteria of happiness.

But what if all of this is wrong. What if the proper welfare and objective function is actually a flow, and moreover an ephemeral flow. What if instead of maximizing income or wealth, the proper liberal market maximand is novelty.

This is what evolutionary economists believe. And it is also true that neoclassical growth theorists and mystics alike always insist upon there being a something that is maximized. It might be some notion of eternal goodness and welfare, or it might be some notion of growth. Yet the great development economist Amarta Sen says that what should be maximized is forward opportunity. The great uber-economist Friedrich Hayek says the same thing, noting that this means the growth of knowledge. And theoretical evolutionary biologists all insist (since Fisher) that what evolution maximizes subject to reproduction constraints is variation."

I think the question is a good one: "But what if all of this is wrong?" I'm thinking that the answer isn't to maximize novelty. Not because I suspect novelty isn't really valued. Rather, I'm not so sure we should think the "market" is supposed to ideally maximize anything.

I also suspect that Hayek might well disagree that he thought the "market maximand" was forward opportunity. I suspect Hayek might well have said that the market is not supposed to ideally maximize anything.

My suggestion is that the goal is generally individual liberty, and therefore I value "the market" because this is a realm of daily life that, of itself, is the very essence of liberty. Even when government coercively seeks to force the market in one direction or the other, "the market" tends to move of "it's" own accord. Individuals don't like to be forced, so they move their activity and their choices away from the force and in the direction of some other realm of daily life that allows liberty. The significance of the market seems to me to be liberty, and the icing on the cake that is the market is that, as Smith and Hayek taught, spontaneous order emerges from the realm of individual liberty we call "the market."

H.B. Phillips, quoted in The Constitution of Liberty by F.A. Hayek, offers an explanation as to why liberty is so important.

Throughout history orators and poets have extolled liberty, but no one has told us why liberty is so important. Our attitude towards such matters should depend on whether we consider civilization as fixed or advancing. . . . In an advancing society, any restriction on liberty reduces the number of things tried and so reduces the rate of progress. In such a society freedom of action is granted to the individual, not because it gives him greater satisfaction but because if allowed to go his own way he will on the average serve the rest of us better than under any orders we know how to give.

Individual liberty is important for the well-being of everyone else. So simple, yet so true.

"But wait, this time it's worse. The current Senate proposal would actually require oil companies with daily production of 500,000 barrels or more to disregard generally accepted accounting principles, by revaluing their oil inventories. GAAP accounting (and current tax law) allows oil firms to value barrels of oil sold at what it costs to replace that barrel.

The Senate bill would require the companies to revalue their inventories by $18.75 a barrel -- an arbitrary number if there ever was one. In effect, this means that Congress is creating the illusion of higher oil profits, and thus raising the tax liability of oil companies by an estimated $5 billion next year. This would be on top of the 35% tax rate they already pay on their actual profits."

Isn't this just about par for the course? Could our fearless elected leaders really consider mandating that oil companies value a barrel of oil at $18.75 for the purposes of calculating a tax burden? And, I wonder who benefits from such a law?

Wednesday, November 16, 2005

"James Buchanan has just published a paper that everyone should read -- 'Cost, Choice and Catallaxy: An Evaluation of Two Related But Divergent Virginia Traditions,' in Charles Rowley and Francesco Parisi, eds., The Origins of Law and Economics (Edward Elgar, 2005). Rowley organized a lecture series over several years which brought to GMU all the founding fathers of law and economics and the current leaders in the field. These lectures are now published in this wonderful volume.

In his essay Buchanan seeks to explain the similarities and differences between himself and Coase with respect to the economic analysis of the law. Coase is an opportunity cost thinker, as is Buchanan, but Coase according to Buchanan is an objectivist while Buchanan states that: 'I have been, I hope consistently, almost throughout my whole career, a subjectivist, a stance that will not allow me to lay down normative criteria for courts or for anyone else.' Buchanan's position cuts at the core of the cost/benefit analysis that is crucial to standard law and economics. As might be expected from Buchanan, he directs his subjectivist critique of cost/benefit and equilibrium analysis and argues instead for a subjectivist, process and constitutional perspective."

These days I'm with Buchanan, and I think it is important to consider the differences in perspectives. The idea is that while both Buchanan and Coase emphasize opportunity costs, the subjectivist stance of Buchanan is that opportunity costs are subjectively known by each individual decision maker, and not something that can be objectively observed and measured by an external perspective. Coase takes this objectivist stance that opportunity cost can be measured by an external observer.

If law and economics is a field of study that relies on economic efficiency analysis, then it will have to be a field of study that accepts the objectivist position. Without the belief that we economists can measure the relevant benefits and costs that individual actually perceive when making decisions, we would be unable to pursue empirical efforts to identify public policies that are efficiency.

Of course, this is precisely Buchanan's position. Because he finds individual values and opportunity costs to be subjective and understand by individual decision makers but not objectively measurable by economist, Buchanan says he cannot "lay down normative criteria for courts or for anyone else." Instead he emphasizes process and decisions about government from a constitutional perspective, not from the perspective of the normative properties of allocative consequences.

My suggestion is that individual perceptions of well-being, economic value, and opportunity cost are indeed subjective. Perhaps we might think we are able to estimate such values at the margin in various ways, but the models that lead us to such conclusions are static, not dynamic and evolutionary. Our lives are not static and determinate. Individual lives are dynamic and adaptive, evolutionary and emergent. Combine subjective individual values of benefits and costs with a dynamic view of economic life and the conclusion seems to me to be to leave economic efficiency behind, and emphasize liberty and process.

"In one corner are the Republicans, who propose to 'cut' entitlements over the next five years by $35 billion (Senate) and $59 billion (House). GOP 'moderates' were so spooked by even this amount that last week they forced their leadership to pull the budget from a scheduled vote on the floor. The Republicans could not corral even a single Democratic vote for a budget they say contains savage cuts. To which we can only respond: what cuts?

The reality is that over the next five years the total federal budget is expected to exceed $13.855 trillion. The Republican faux-Slimfast plan basically erases the rounding error, or the $0.055 trillion, and leaves the $13.8 trillion untouched. To put it another way, the GOP plan reduces the increase in the federal budget by a microscopic 0.25% over the next five years. The new prescription drug bill by itself adds some $300 billion to the budget over this same five years, or six times what this 'deficit reduction' bill would save.

In the other corner are the Democrats who supposedly learned 'fiscal discipline' at the knee of Robert Rubin. Not quite. Their Congressional leaders, Nancy Pelosi and Harry Reid, have denounced even these paltry GOP savings as 'shameful' and 'immoral.' They even brought a dozen Katrina Hurricane victims to Washington, trotted them out in front of the national media, and proceeded to lambaste Republicans for shredding the social safety net.

The hypocrisy here is nearly immeasurable. Earlier this year when President Bush tried to fix Social Security with private investment accounts and slower benefit growth for high-income seniors, his critics said the health care cost 'crisis' was more urgent. But now liberals are assailing even the tiniest slivers in Medicare and Medicaid as shameful and anti-poor.

Here's a reality check on the state of the safety net: For the past five years federal spending on anti-poverty programs has increased by 41%. Medicaid, which provides health care for the poor, is scheduled to grow by 7.9% a year, and under the GOP plan it would grow by 7.5% a year. Either way the program expands by more than double the rate of inflation through 2011. Meanwhile, we still await those Democrats who fancy themselves as deficit hawks to propose even one remotely serious entitlement reform."

What are we to do? Both sides of the political isle seem to embrace more spending and larger national government. Years ago David Stockman wrote a book about the national government budget, and he argued that "we" (meaning citizens and taxpayers) got what we wanted, i.e., big national government. Is this really what "we" intended to do -- elect a bunch of politicians to spend our money like drunken sailors?

Tuesday, November 15, 2005

Have you been hearing about the avian flu? Are you wondering what public policy should be regarding avian flu? You might be interested in Tyler Cowen's analysis. He has several suggestions for what to do. Here are his don'ts:

"We should not do the following:

1. Tamiflu and vaccine stockpiling have their roles but they should not form the centerpiece of a plan. In addition to the medical limitations of these investments, institutional factors will restrict our ability to allocate these supplies promptly to their proper uses.

2. We should not rely on quarantines and mass isolations. Both tend to be counterproductive and could spread rather than limit a pandemic.

3. We should not expect the Army or Armed Forces to be part of a useful response plan.

4. We should not expect to choke off a pandemic in its country of origin. Once a pandemic has started abroad, we should shut schools and many public places immediately.

5. We should not obsess over avian flu at the expense of other medical issues. The next pandemic or public health crisis could come from any number of sources. By focusing on local preparedness and decentralized responses, this plan is robust to surprise and will also prove useful for responding to terrorism or natural catastrophes."

Tuesday, November 08, 2005

"This goes to the argument in Thomas Woods' The Church and the Market that says that moral arguments that do not recognize economic realities are not effective moral arguments. I find this position compelling.

Thus it seems to me that we ought to be able to demand that opponents of markets bear the burden of proof on showing how alternative institutions will provide a superior outcome on both moral and practical terms."

The issue underlying this blog post seems to be whether or not to use markets to allocate water. This may be another illustration of an inaccurate or imprecise discussion of "market." I suspect that the mistake in analysis here is to actually characterize the policy concerns as whether to market water or not. I suspect the real issue is whether to have individuals own water on terms like any other private property ownership, or whether to have government own the water.

I don't think we can have something owned in a way other than private ownership. The question then is whether individuals own water or government is the only private owner. If individuals do not own water, then either no one owns water and it is an open access resource, or government owns water. Government in the western United States seems to allow individual ownership, yet it does not allow the voluntary transfer of that ownership. I think this means government really owns the water and has decided on rules by which it will exclude some people from using water while allowing others.

The government can give up ownership and allow individuals to own and trade water, or it can continue with it's own ownership. If government continues it's own ownership, then the policy discussion should more explicitly discuss the rules government should choose with respect to excluding and allowing access and use of its water.

Monday, November 07, 2005

"There are at least two variants of the argument that biodiversity should be increased. The weak goal seeks only to weigh costs against benefits when choosing the level of protection to be given to endangered species. The strong goal requires that every endangered species be protected, regardless of expense.

Many environmentalists implicitly or explicitly espouse the strong goal, and it is this goal that is embodied in the Endangered Species Act (ESA). What I wish to argue here is, first, that the public has not supported this view. To the extent that they have accepted that increasing biodiversity is a desirable goal, it is the weak goal that they have adopted, not the strong goal. Second, I argue that environmentalists’ support for the strong goal is only the public expression of a deeper goal: the protection of natural landscapes."

[. . . .]

Dozens, if not hundreds, of examples can found of situations in which environmental groups had pressed unsuccessfully for preservation of a habitat, not because it was believed that the habitat was home to an endangered species, but because the proponents wished to preserve the natural landscape. When an endangered species was found to live in the habitat, the presence of that species was used to justify the preservation of the species’ habitat. For example, opponents of suburban growth have discovered new allies in the pygmy owl on the outskirts of Tucson; the golden-cheeked warbler in the Balcones Canyonland on the edge of Austin; Preble’s meadow jumping mouse habitat near Denver; and Orcutt grass and fairy shrimp in Sacramento. And the spotted owl has provided a trump card for those who had previously fought unsuccessfully for preservation of old growth forests in Washington and Oregon.

In none of these cases can the sincerity of the proponents of endangered species protection be questioned. But in each case, and in many others, it is clear that preservation of natural landscapes was of at least as much importance as preservation of species. My argument here is that, in the public debate, it is important to recognise what the true, underlying goal of public policy is. In this case, I suggest that we would be advised to place less emphasis on species and more on landscapes.

Do you think this is a plausible hypothesis? If so, can we expect to preserve landscapes through the regulation and prohibition of land uses, or should we expect government to have to purchase the land parcels that make the landscapes? I think purchase would be required, at least if we are interested in effectiveness and in justice.

Friday, November 04, 2005

"While everyone understands that some spheres of life should not be subject entirely to market forces. . ."

I'm not sure I did a very good job with my thoughts in that earlier post. I think maybe I can do better today.

It seems to me that the perspective presented by such a sentence is likely to be backwards. Let's start be considering what market forces involve. Fundamentally, market forces involve a buyer and a seller making an exchange. The interaction between people involved in "market forces" is a voluntary interaction. The realm of market forces involves the realm of voluntary action in our lives. Of course, not all voluntary action is going to be described as part of a market. Not all aspects of our lives involve exchange. Market forces involve voluntary interdependent actions that we characterize as exchange.

One reason we talk about "market forces" is because we are interested in the role of government and public policy in our lives. A fundamental difference between market forces and government (public policy) is that while markets are voluntary, government is inherently coercive.

When considering a statement like "some spheres of life should not be subject entirely to market forces", we are led to ask: What spheres of our lives should not be subject to market forces? Because I see the market as part of the "spheres of our lives" that are characterized by voluntary individual behavior, I don't think this question is really very informative. I think our starting point, or our default position, should be voluntary choices. It seems quite easy to justify voluntary choices and voluntary behavior, at least if such voluntary behavior does not harm others. I think a better way to put the relevant question is: What spheres of our lives should be subject to coercion or coercive forces? If one chooses to interact with others in exchange and through prices, or if one chooses to interact with others without prices and without exchange, either way the interactions are voluntary. It seems to me quite difficult to be concerned about the voluntary realms of our lives. The really important questions involve what realms of our lives we think it is appropriate to be subject to coercion or coercive forces. I believe the answers to such questions will point to the appropriate role for government in our lives.

As I said earlier this week, I think most will agree that it is wrong, in general, to coerce (or aggress against) another person. There is one exception to this general principal: coercion or force may be used against another in self-defense. The police power role for government fits this idea of self-defense. That is, we turn to government and give it the power to protect us from harm to our person or our property that would be caused (or has been caused) by another.

The really interesting and important questions do not involve what spheres of our lives we want to be characterized by voluntary choices and behavior, but what spheres of our lives do we want to say that it is acceptable for coercion to be used to interrupt what would otherwise by the voluntary spheres of our lives.

Thursday, November 03, 2005

"Tim Harford's The Undercover Economist has just been published. It is not a principles of economics text, but it is perhaps the best book currently available in its genre. In my opinion there is more economic intuition behind this book than Freakonomics -- a judgment which might shock some readers. But the persistent and consistent applications of opportunity cost reasoning and explaining how order emerges out of the behavior of individuals even though it is not anyone's intention to promote the overall order is revealed throughout The Undercover Economists in a vareity of illustrative stories from throughout the developed and developing world. We get stories of wonderful unintended desirable consequences within some regimes, and the horror of unintended undesirable conseuqences in others. Harford's work is one which champions 'looking out the window' and making sense of what is seen through the economic way of thinking. In many ways this is what it is all about, and once you 'get it' it is wonderfully addictive and transformative. Economics is the mind-quake everyone needs to make sense of the world around us, and on the basis of that understanding arrange our political, legal social and economic affairs so we can simultaneously achieve liberty, peace and prosperity."